ECON 002 - Principles of Microeconomics Drake University, Fall 2017 William M. Boal

### Version A

I. Multiple choice

(1)b. (2)b. (3)c. (4)b. (5)a. (6)e. (7)a. (8)d. (9)a. (10)c. (11)d. (12)b. (13)b.

II. Problems

(1) [Percent change, midpoint formula: 2 pts] ΔP = \$30 and midpoint P = \$120, so percent change is \$30/\$120 = 25 percent.

(2) [Percent change of product: 4 pts]

1. increase.
2. 3 percent (= +5 percent -2 percent).

(3) [Production functions: 7 pts]

1. Average product = total output / total input: 4, 5, 6.
2. Marginal product = Δ output / Δ input: 4, 6, 8.
3. Diminishing returns? NO because MP is increasing.

1. 1 calculator.
2. 2 calculators.
3. 1 sweatshirt.
4. 1/2 sweatshirt.
5. Country X, because it has lower opportunity cost of producing sweatshirts.
6. Country Y, because it has lower opportunity cost of producing calculators.
7. Both countries can consume combinations of products outside their individual production possibility curves if Country Y exports three calculators to Country X, which exports 2 sweatshirts in return.
8. Plot should show each country's production before trade, and consumption after trade.

(5) [Market equilibrium: 12 pts] First use the graph to draw demand and supply curves. The curves should have stairsteps, similar to those for the trading activity we did in class.

1. excess demand.
2. \$10.
3. 6 units.
4. \$60 (= price × quantity).
5. \$51.
6. sellers.

(6) [Shifts in demand and supply: 15 pts] Full credit requires accurate graphs.

1. right, unchanged, increase, increase.
2. unchanged, right, decrease, increase.
3. left, left, cannot be determined, decrease.

(7) [Consumer surplus, producer surplus: 22 pts]

1. excess demand, because at this price, quantity demanded exceeds quantity supplied.
2. 6 thousand.
3. price will tend to rise.
4. \$6.
5. 10 thousand.
6. \$13 = height of demand curve.
7. \$7 = willingness-to-pay minus price.
8. \$4 = height of supply curve.
9. \$2 = price minus marginal cost.
10. \$50 thousand = area of triangle bounded by demand curve, vertical axis, and price.
11. \$25 thousand = area of triangle bounded by supply curve, vertical axis, and price.

(8) [Consumer surplus, producer surplus: 4 pts]

1. Consumers are worse off, because price has increased.
2. \$16 million = Δ CS = area of trapezoid bounded by demand curve, vertical axis, old price, and new price.

III. Critical thinking [4 pts]

(1) We are given that
share of spending on food = price × quantity / income.
Using the approximation rules for percent changes of products and ratios,
% change in the share = % change price + % change in quantity - % change in income
= 5% + 1% - 9% .
Thus the share of spending on food decreased by about 3 percent.

(2) We are given that
US price < Europe price.
The midpoint or average of the prices must lie in between, so we have
US price < midpoint < Europe price.
Now the larger the denominator, the smaller the fraction. It follows that
Δ price / US price > Δ price / midpoint > Δ price / Europe price.
In words, the largest percent difference is computed if the U.S. price is used as a base, and the smallest percent difference is computed if the European price is used as a base. When the midpoint formula for percent difference is used, a value in between these two is computed.

### Version B

I. Multiple choice

(1)d. (2)c. (3)b. (4)c. (5)b. (6)d. (7)c. (8)b. (9)b. (10)d. (11)a. (12)b. (13)a.

II. Problems

(1) [Percent change, midpoint formula: 2 pts] ΔP = \$40 and midpoint P = \$200, so percent change is \$40/\$200 = 20 percent.

(2) [Percent change of product: 4 pts]

1. decrease.
2. 2 percent (= +5 percent - 7 percent).

(3) [Production functions: 7 pts]

1. Average product = total output / total input: 6, 5, 4.
2. Marginal product = Δ output / Δ input: 6, 4, 2.
3. Diminishing returns? YES because MP is decreasing.

1. 1/2 calculator.
2. 1 calculators.
3. 2 sweatshirts.
4. 1 sweatshirt.
5. Country X, because it has lower opportunity cost of producing sweatshirts.
6. Country Y, because it has lower opportunity cost of producing calculators.
7. Both countries can consume combinations of products outside their individual production possibility curves if Country Y exports two calculators to Country X, which exports 3 sweatshirts in return.
8. Plot should show each country's production before trade, and consumption after trade.

(5) [Market equilibrium: 12 pts] First use the graph to draw demand and supply curves. The curves should have stairsteps, similar to those for the trading activity we did in class.

1. excess supply.
2. \$4.
3. 4 units.
4. \$16 (= price × quantity).
5. \$43.

(6) [Shifts in demand and supply: 15 pts] Full credit requires accurate graphs.

1. unchanged, right, decrease, increase.
2. left, unchanged, decrease, decrease.
3. right, left, increase, cannot be determined.

(7) [Consumer surplus, producer surplus: 22 pts]

1. excess supply, because at this price, quantity supplied exceeds quantity demanded.
2. 3 thousand.
3. price will tend to fall.
4. \$7.
5. 8 thousand.
6. \$12 = height of demand curve.
7. \$5 = willingness-to-pay minus price.
8. \$6 = height of supply curve.
9. \$1 = price minus marginal cost.
10. \$32 thousand = area of triangle bounded by demand curve, vertical axis, and price.
11. \$16 thousand = area of triangle bounded by supply curve, vertical axis, and price.

(8) [Consumer surplus, producer surplus: 4 pts]

1. Producers are better off, because price has increased.
2. \$14 million = Δ PS = area of trapezoid bounded by supply curve, vertical axis, old price, and new price.

III. Critical thinking

Same as Version A.